3 Reasons to Buy This Stock if It Misses Earnings Estimates

Terex has stood out as one of the resilient stocks in an otherwise lackluster construction equipment space this year. The stock had given up most of its gains for the year in mid-June, after the company unexpectedly downgraded its earnings guidance. Yet, Terex's stock never really lost favor with investors -- in a month's time, Terex's stock is back in the game.

What investors might now want to know is whether Terex will sustain the momentum going forward. They may get an answer Wednesday, when the company reports its quarterly earnings.

Will Terex zoom ahead? Image courtesy of www.worldcarslist.com

Don't expect surprisesTerex's second-quarter numbers are unlikely to exude excitement, since analysts are expecting its EPS to be $0.55, which is also the middle point of the earnings guidance that the company gave in June. That translates into a 27% drop in EPS year over year.

Nevertheless, Terex's earnings call could give important information relating to several key aspects of the company, which should give investors a fair idea of where the company is headed. Here are the three important things that investors should look for in Terex's upcoming earnings report.

Are the orders flowing in?Investors should see if Terex's backlog is growing. Backlog value is a good gauge of the company's potential revenue over the next 12 months. In its first quarter, Terex's largest segment, aerial work platforms, or AWP, reported a double-digit jump in backlog value, indicating that orders for equipment are strong. A growing backlog is a good sign.

In fact, I am expecting Terex's AWP division to report the highest growth in sales among all divisions in the second quarter, since demand for telehandlers and booms remains strong. Robust demand for access equipment even encouraged peer Oshkosh , which derives more than 40% revenue from the AWP business, to upgrade its full-year EPS guidance in its previous quarter. Oshkosh's earnings upgrade is important, because the company relies on the struggling defense industry for the major part of its revenue.

The market was a little wary, though, when some days prior to Oshkosh's announcement, leading construction equipment maker Caterpillar slashed its full-year revenue guidance significantly to $57 billion-$61 billion, from its earlier projection of $60 billion-$68 billion. But what investors should know is that Caterpillar is largely dependent on the beleaguered mining industry for revenue, unlike Terex. That's also the major reason why Caterpillar downgraded its guidance.

Is North America losing strength?All might not be well with Terex, though. Europe remains a challenge -- this market contributes more than 30% to Terex's top line. Worse yet, Terex also hinted at a slower North American construction market when it revised its full-year earnings guidance down by more than 20% to between $1.90 and $2.10 per share in June. Now that could be a problem, because North America is also where Terex is primarily banking for growth.

Peers seem to be feeling some pressure as well. Recently, Caterpillar reported a sharp 16% slump in machine sales from the North American market for the three months ending May. Earlier, Deere , which derived 19% of its equipment sales from the construction equipment business last year,sounded the warning bell when it projected its sales from the business to fall by 5% for the full year. Deere maintained a cautious outlook on the U.S. market.

If Terex's second-quarter domestic sales fall and the outlook remains muted, it could be a warning signal for Terex investors to expect the company to grow at a slower rate in the near future.

Where is management's focus?In the backdrop of lower expectations on the top line, a lot will depend on what Terex's management is doing to tackle the headwinds. In its upcoming earnings call, investors should look for any cost-cutting measures that Terex is taking, and whether they are translating into higher margins. Better pricing, combined with lower spending, helped Terex realize a one percentage point gain in its gross margin during the first quarter, despite a 5% fall in revenue. If margins continue to grow, it's a healthy sign.

Likewise, investors should note whether Terex's cash flow is growing, because the company shoulders a large debt burden of over $2 billion and cash on hand of just about $730 million. In uncertain times, strong cash flows act like a safety cushion.

The Foolish bottom lineTerex's second-quarter growth may disappoint on both the top and bottom lines, but sluggishness in key markets looks like a short-term headwind. If Terex's backlog, gross margin, and cash flows trend higher, investors need not worry much. With the key metrics remaining at healthy levels, Terex will be a good stock to ride the upturn.

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